Development for newbies- where do people go for help?

Partner and i are looking to do a dual occupancy build on our home we bought during COVID (overpaid, build costs were $300k less than they are now) Im following all the advice from everyone to do a feasibility but i dont know what we are missing and how to calculate the returns on this as we are going to live in one of the houses.

Summary
- Below shows feasibility if we sold 1 house upon completion and kept the other house for us to live in (this is my first ever feasibility so i could be missing key things)
- Our main goal is to pay off our mortgage asap.
- Question: how do i make a decision from this? My numbers are showing me that once we sell unit 1, we've made a loss of $164k and overall it doesnt look like a feasible project with a long run gain of $25k.



HOWEVER when i try to work out loan changes; it feels like we are better off:
Current loan= $600,000
Add construction loan= $1,400,000
New loan= $2,000,000
Less : Sale of house ($1,600,000) and less loss of venture (-$164,800)
Net position: $564k loan with Unit 2 as an asset.

- What am i missing? Which numbers do i use as my feasibility?

Sorry if this is 101 for everyone here but im genuinely baffled on how we make a decision on this.

 

I don't understand your numbers at all.

What's the value of the property now?
What's the cost to develop?
And what's the estimated end value?

Just put those numbers together first before the rest.

 

Its going to be worth less than it costs you? If so why is there tax to pay?

 

The house is currently as a whole valued at 1.4m (old house big block). Once we subdivide we expect one of the duplexes to sell for 1.6m which is the going rate around here. The reason I had unit 2 as 2m is because we expect to hold onto it so I can’t really calculate feasibility on selling both upon completion if that makes sense?

Cost to develop 1.3m

 

We will be able to make it work. I haven’t counted rent costs as there are options for us to live with family.

 

Just doing the back-of-napkin numbers first seems to indicate there isn't enough margin to be worth it.

1.4 + 1.3 = 2.7 with a 3.2 end value? 18% gross napkin margin?

Add in all the smaller incidental costs and then the overall risk. Looks like an easy "no way" to me?

 

I guess that’s my question above- like how do I make an informed decision? What margin should I be looking for and if we don’t plan to sell the 2nd one then the value of it isn’t 1.6m, would be higher as we plan to hold onto it for at least 10 years. Hope that makes sense! Every calc I see has an assumption you’re selling both in which case I totally agree that it is a “no way” project.

 

Yea apologies I misinterpreted your question as asking if I can afford to rent during the build. We probably wouldn’t be able to afford to hold one - would be a massive stretch.

 

You can't really use projected figures 10 years in the future for your feasibility. Using that logic I could just buy something now for $1.6 mil and do nothing - suddenly my feaso is better than yours:

1.6 + 0 build costs = 2 mil end value. 25% margin with no build risks!

Do your projections on current values, and if the answer is "no way" then its "no way". The only real difference if you're not selling is that you can arguably remove the selling costs and tweak the tax figures a bit. But that doesn't make up for the massive risks involve in building.

 

Thanks I appreciate the feedback! Do you know who we can get to help us with this? Like to properly do the numbers and choose a strategy?.

We bought this old house (60 years old) because that was our strategy but now we feel stuck with an old house we can’t recoup the cost we paid for. The other options are obviously to sell and buy an established home but we stand to lose 250k if you consider stamp duty costs, or to buy another property to live in with our equity (800k ish) in which case we’d be in a heap of debt.

We’re not connected in the property community and don’t know what factors we are/not considering!

 

Oh and can I ask more generally what does make a project feasible? Going by your example of :
Current value + build cost = x
X > future value

Does that mean it is only worth it if you score land that is very cheap (knockdown) or if you get your build cost down?

 

I think you need to work out and adjust the construction costs.

Go talk to some project builders (not the biggest) who have some flexibility and can do a duplex or dual occupancy. Usually these types are the best for newbies and cost effectiveness. Negatives are you don't have as much control and you are just a number in their client list and builds (usually admin more than actual builds) take a lot longer.

One tip if you cant the feasibility to work on double storey consider single storey. End values might not be as high but profits may be.

Not experienced in building in Melbourne but from what I can tell its on the more competitive side

 

Sort of. I would just say that generally developments like duplex builds and small scale stuff doesn't stack up feasibility wise. So yes, you would generally want something special like being able to get special build costs, or very selective with your site purchases.

For example I scour through something like tens of thousands of listings before I find a site I would want to pull the trigger on, since I'm not a builder.

 

question im new to this - and at stage of trying to get quotes for design of 3 townhouses, planning permit and potentially get same company to do the working drawings as well.

what things should i be looking for apart from price between the 3 quotes etc, what do you normally look for to identify good value?

 

Hi Sara,

I feel like your a bit lost in numbers and what to do next.

You need to find someone to walk you through the numbers and how it works.

 

A few things to consider:
Tax - you need to pay tax on any profit made from the sale of the properties.
GST - you need to speak with an accountant and factor in paying GST on the sale, less gst paid
Borrowing - I underestimated just how hard it was to borrow for my first development. In hindsight I would have been almost better off not developing. I had to sell my PPOR and IP and pay out any debt in order to get the development loan. Properties rose n value and the profit I made from the development was not much more after tax than what I would have gained in equity from my previous 2 properties. Not to mention my cash flow was tight given I had to pay out my small loans (cars).
Margin - you should aim for 20% margin after all costs, interest, gst, tax etc

 

In a build-and-hold scenario, is a depreciation schedule based of the completed value, or the build cost?

I get that depreciation has nothing to do with the land component, but if you spent say $500k building a townhouse, which was then deemed to be worth $600k (building only, not land) at completion, is that the level you'd start depreciating from?

 

Thank you that’s extremely helpful. What was the reason you did the build given you had a PPOR already?